Dr.
Younkins is a Professor of Accountancy and Business Administration at Wheeling
Jesuit University in West Virginia.

OPINION

ANTITRUST
LAWS SHOULD BE ABOLISHED

by
Edward W. Younkins

Antitrust laws purport to prevent monopolies and encourage competition.
However, since their advent in 1890, history has shown that they do not
prevent monopoly, but, in fact, foster it by limiting competition. These
laws permit the federal government to regulate and restrict business activities,
including pricing, production, product lines, and mergers, ostensibly in
order to prevent monopolies and stimulate competition. In actual fact,
government has been the source of monopoly through its grants of legal
privilege to special interests in the economy. The social cure for such
« coercive » monopoly is deregulation and repeal
of the antitrust laws.

Microsoft is currently being accused of integrating Windows with Internet
Explorer and bundling them together as one product in order to «
force » customers to have all of Microsoft's products. It
is alleged that Microsoft is violating antitrust laws because it prevents
people from breaking down Windows into its component parts and installing
some, but not all, of the parts. Microsoft supporters contend that customers
are happy to receive an extra product at no additional cost and that Microsoft's
opponents are simply envious of Microsoft's success. Consumers and PC manufacturers
like integration – tying can be a helpful way to economize on resources.
In addition, clicking an icon on Windows desktop is only one of many ways
to access the Internet. Customers can even use Microsoft's own browser
to download a competing browser for future use.
From a free-market perspective, the situation simply appears to be competition
between rivals vying for leadership in sales and innovation. Microsoft,
like Standard Oil, is a victim of a political assault because it has innovated,
expanded output, and reduced prices. Both attacks were initiated by less
efficient rivals who wanted to accomplish through the political process
what they could not accomplish in the competitive marketplace. Since Windows
and Internet Explorer are Microsoft's property, the company logically has
the right to sell them how they choose and to tell PC makers the terms
under which they should be sold(1).A
look at Some Antitrust Targets
The alleged purpose of antitrust laws is to protect competition based on
the idea that a free unregulated market will inevitably lead to the establishment
of coercive monopolies. However, a coercive monopoly cannot be established
in a free economy – the necessary precondition of a coercive monopoly is
closed entry which can only be achieved by an act of government intervention
in the form of special regulations, subsidies, or franchises. There is
no invulnerable monopoly unless it is protected by the state. As long as
the possibility of substitution exists, there should be no fear of coercion
by monopolists. Rival firms can develop substitutes for the monopolized
good or service. In the absence of force, others are free to enter the
field and offer similar goods or services. As long as others are free to
enter any business of their choice, no firm can get away with whatever
it wants to do without facing the prospect of a would-be competitor entering
the market. Industrial concentration is most often caused by superior efficiency
on the part of one or a few firms in a given industry. It follows that
a reduction in the number of competitors is not necessarily in restraint
of trade unless it was accomplished through force or fraud.
The term « shared monopoly » connotes
a conspiracy among firms to monopolize a market. What it actually refers
to is a few firms who conduct a large portion of the business in some product
or service line. These firms are not monopolists – they are in fact, competing
with one another. The concept of « shared monopoly
» is therefore logically deficient(2).

« The essence of the monopoly problem is the existence of
legal barriers to competition or rivalry. These keep the market from producing,
disseminating, and utilizing the information that people need for planning
and decision making. »

In addition, there is nothing wrong with output restriction. Owners of
property have the moral right to use and allocate their resources in what
they perceive the most efficient and profitable manner over time in accordance
with existing and expected future market scarcities.
Pricing has been a particularly popular area for antitrust action. If a
company charges a price higher than its competition and it continues to
attract customers, it is deemed to have a monopoly per se (e.g., drug companies).
If a firm charges a lower price then it is attempting to monopolize (e.g.,
Wal-Mart)(3).
And if several firms charge the same or similar prices they are guilty
of price-fixing (e.g., airlines)(4).
In the first case, if the prices are set high, then new competitors could
be expected to enter. In the second case, the firm is likely to simply
be competing, although it is often charged with « predatory
pricing » – pricing products below costs temporarily
in order to drive competition out of the market and then raising the price
in a market devoid of competition. In the long run, predatory pricing cannot
work because firms cannot suffer losses for long periods of time and the
fact that if the prices are subsequently raised then the prospect of profits
will attract new entrants including beaten companies that could reopen.
In regard to the third case, there is nothing sinister about price coordination
or other forms of collusion for that matter. Companies cooperating to increase
their profits are no different from any joint venture, partnership, or
joint stock company. In addition, it is well-known that cartels are inherently
unstable because of the tendency for members to cheat. Then there is the
possibility that price coordination may actually improve the efficiency
of the market since the reduction of price variability could reduce search
costs on the part of the consumers.
Antitrust restrictions on mergers and acquisitions have had the effect
of protecting incumbent managers and corporate assets from the prospect
of efficient reorganization(5).
There is nothing wrong with buying out competitors since no coercion is
involved. Vertical mergers are often disallowed on the grounds that purchasing
a raw materials supplier forecloses rivals of the manufacturer with respect
to the raw materials. In addition, it is often alleged that it is wrong
for a supplier to merge with a retailer since this supposedly cuts off
competition of the supplier regarding channels of distribution. The assumption
that increased purchases of a raw material by one firm means that there
will be less for others is illogical. As long as there is a demand for
a raw material someone will step up to supply it. With respect to suppliers
supposedly cut off from channels of distribution, nothing is stopping them
from integrating or from finding other retailers to deal with.
Prevention of exclusive distribution agreements not only impede the development
of the most efficient arrangements for distributing goods and services,
an individual's right to voluntarily negotiate the most profitable contracts
would also be denied. Exclusive deals are perfectly acceptable – there
may be some other firms that would then create competing products(6).
Also attacked are tying contracts – agreements between buyer and seller
that bind the buyer to purchase one or more products in addition to the
product in which he is mainly interested(7).
Forbidding the legitimate marketing strategy of all of the package or none
of it denies the owner of a product to offer it for sale in the form that
he desires.
As can be seen from the above, the very practices most threatened by antitrust
are the core elements of the competitive process. The effect of antitrust
restrictions is to protect inefficient competitors and harm consumers.Pure
and Perfect Competition: An Unrealistic Ideal
Antitrust regulation is based on an unrealistic economic model that compares
the structure of existing markets with an arbitrary abstract ideal of pure
and perfect competition that can never be attained in the real world. This
model, which is used as a benchmark to judge monopoly and for resource
misallocation analysis, includes the following conditions: 1) homogenous
and unchanging products offered by all the sellers in the same industry;
2) numerous sellers who individually have insignificant impacts on prices;
3) the possession by all market participants of perfect knowledge with
respect to all relevant information; 4) no barriers to entry or departure
to and from the market (i.e., ease of investment and disinvestment through
equal and costless entry and departure); 5) firms do not cooperate (i.e.,
collude); 6) no fear of retaliation by competitors in response to a firm's
actions; 7) no need for advertising; and 8) economic profits tend toward
zero(8).
The traditional antitrust model teaches that competitive markets tend toward
an equilibrium where price, marginal cost, and minimum average cost are
all equal and where consumer welfare is maximized. According to this perspective,
consumer welfare could not be maximized if companies advertised, products
were differentiated, some firms could achieve economies of scale that are
unobtainable by their competitors, or if collusion or high market share
could lead to a degree of control over market prices.
The traditional antitrust model is irrelevant in a dynamic business world
involving imperfect information. True competition is a process, not a structure,
in which a profit seeking company, operating with limited information,
attempts to coordinate production and distribution with the desires of
potential customers.

« True competition is a process, not a structure, in which
a profit seeking company, operating with limited information, attempts
to coordinate production and distribution with the desires of potential
customers. »

Real world divergences from pure and perfect competition are not necessarily
indicative of market failures. Companies should advertise and attempt to
differentiate their products. Competition in a free market includes the
process of observing and adjustment under conditions of uncertainty involving
both cooperation and rivalry. An innovative firm's lower costs should keep
high cost firms out of the market. When price exceeds cost, information
and incentives are provided to entrepreneurs to invest resources in a particular
line of business.
Antitrust regulation undermines the discovery process. Regulators, judges,
politicians, and economists cannot know the most efficient organization
of an industry including the number of firms it should include, what prices
they should charge, and what kinds of contractual agreements they should
make with retailers, consumers, and each other. Such knowledge can only
emerge through a trial and error discovery process in the marketplace.
The essence of a free market is not pure and perfect competition but rather
the freedom to compete.
The Platonic ideal of pure and perfect competition has been derived from
an ideology that is based on the collectivist view that the individual
human person is subservient to a greater entity – Society, the State, or
Mankind. It follows that private property is not truly private – it is
merely held as a trustee for the real owner, « Society. »
The reasoning is that « Society » has a preemptive
right to the property of every producer and permits him to continue in
business only for the time and to the extent that « Society
» considers to be in the maximum interest of all(9).
It follows that acceptance of the altruist ideal of unrewarded service
to others is behind the antitrust model of pure and perfect competition.
According to altruist morality, the conduct the model requires is pure
and perfect. It portrays a world in which no one can succeed at the same
time that others fail(10).
Consequently, all firms participate in a process that yields equal benefits
to all. The traditional economic theory of antitrust is based on the following
philosophical premises: 1) Selfishness is immoral; 2) Capitalism is based
on selfishness; 3) Capitalism is therefore immoral and leads to immoral
consequences; and 4) Social (i.e., distributive) justice is the moral basis
for judging business behaviour.
Even advocates of capitalism such as the economists of the Chicago school
rely on neoclassical price theory, cost-benefit analysis, and the model
of pure and perfect competition as the consumer welfare standard for a
firm's real-world performance. These economists' use of tools such as concentration
ratios, consumer surplus analysis, market share analysis, Herfindahl indices,
Gini coefficients, etc., gives evidence to their underlying altruist premises.
Any market that does not meet the economists' altruistic Platonic standard
is deemed to be a threat to competition and is censured. Successful businesses
are thus punished for not being passive, altruistic servants of society.Antitrust
Laws Should be Repealed
A review of antitrust laws, cases, and targets, and the economic model
upon which they are based indicates that antitrust is largely a failed
and discredited policy. Laws allegedly passed to protect customers have
been used to punish efficient companies that have increased output and
lowered prices. Laws ostensibly designed to restrict monopoly have been
used by governments to restrain and restrict the competitive process. Rather
than protect consumers, it is possible that antitrust laws are enacted
to subsidize and protect less efficient firms from the rigors of the competitive
process. Antitrust enforcement can be used as a war against the competitive
practices that businessmen can employ to better serve customers. Antitrust
laws thus discourage abler firms from operating to the best of their abilities.
In essence, the effects of antitrust laws are like those of a cartel –
maintaining the status quo by stabilizing prices and assuring each firm
that its profits and market position are secure.
Antitrust proponents may be confusing the concepts of competition and monopoly
power. When a firm advertises, is it competing or being anti-competitive?
If a company innovates or spends money on research and development is it
competing or creating a « barrier to entry? »
If a firm lowers its price, is it competing or trying to gain a monopoly?
Competition, rightly understood, is a dynamic, rivalrous, process of discovery.
It is not monopoly, but the prevention of competition that is to be feared
– monopoly which results from superior performance should be welcomed.
The idea of « barriers to entry »
confuses coercive legal barriers with legitimately earned performance and
cost advantages which are likely to benefit, rather than harm, customers.
Competition simply refers to a situation where the basic rules of a free
society are followed – freedom of contract, private property, etc. The
essence of a free market is not pure and perfect competition, but freedom
of competition(11).
In essence, there are two types of monopoly – efficiency and coercive.
An efficiency monopoly earns a high market share because it does good work.
Such a monopoly has no legal power to force people to do business with
it. On the other hand a coercive monopoly results from a state grant of
exclusive privilege. The government may: ban competition, grant privileges,
immunities, or subsidies to one company; or impose costly requirements
on others. What really bothers individuals about monopoly is not that one
firm has economic dominance over a product or service, but that compulsion,
force, or special privilege is used to prevent other firms from entering
the market. There is no social harm in a monopoly if others have an equal
right to enter the field of business. There is a large difference between
monopoly in the sense of being the sole firm in a market, and in the exploitative
sense of using state help or force to keep competitors out. The real robber
barons are firms that look to privileges. Only a coercive monopoly hurts
people because force, rather than ability, is used to keep others out of
the market. The only way that a firm can gain a monopoly without having
to fear the threat of competition is through the force of the government.
The essence of the monopoly problem is the existence of legal barriers
to competition or rivalry. These keep the market from producing, disseminating,
and utilizing the information that people need for planning and decision
making. Legal restrictions cause monopoly power and prices. By repealing
antitrust laws and ending government-sponsored monopoly, the monopoly problem
will be handled more efficiently through the market process.
It is interesting to note that real monopoly power has essentially been
immune from antitrust regulation – government-created monopolies are not
made the target of antitrust investigations. Cable TV and local telephone
services are monopolies by law. Government licensing and tariff and quota
protection restrict competition and produce monopoly profits for privileged
private interests. Government-supported cartels (e.g., agriculture, oil
production, transportation) result in long-run monopoly profits.
Antitrust law is a collection of vague, inconsistent, complex, and non-objective
laws that can make virtually any business practice appear to be illegal.
These laws are so vague that businessmen have no way of knowing until after
the fact if a given action will be declared illegal. Often this system
of « retroactive » law punishes a firm or individual
for an action that was not legally defined as a crime at time of its commission.
Vagueness is inherent in term such as « intent to monopolize
» and « restraint of trade »
– there exists no exact definition for these and other such terms.
Antitrust laws are selectively applied. The antitrust bureaucracy chooses
cases to prosecute based on their potential to further their own private
interests and careers. Antitrust is used to transfer wealth from large
unorganized groups of individuals to the narrow, organized interests of
other groups of individuals. These antitrust benefits accruing to some
(i.e., by limiting competition from their rivals) involve costs that are
usually not apparent since they are spread over so many other firms and
individuals.
Antitrust laws also involve large economic costs. Not only do these include
the expenses involved in defending one's firm in antitrust actions, but
also in the innovations not undertaken, the competitive strategies not
employed, and the mergers that are foregone due to the legal uncertainty
associated with antitrust statutes and bureaucrats.